Crony capitalism or plain corruption?

MURKY POLITICS: In 1981, the Maharashtra Chief Minister A.R. Antulay had to resign following a media expose alleging that he extorted millions of dollars from businesses independent on state resources and put in a private trust named after Indira Gandhi. Photo: The Hindu Archives

Ideological labels are likely to mislead by channelling the debate into issues of capitalism and socialism and detract from the real problem

George Santayana said: “Those who cannot remember the past are condemned to repeat it.” Having forgotten the license-permit-quota-raj that enveloped us from 1950 to 1980 and its ‘crony socialism,’ many intellectuals, mediapersons and politicians have now discovered ‘crony capitalism.’ The license raj consisted of stifling controls imposed on prices, production, capacity, investment, imports and exports, capital markets, banking and finance, land, labour. This provided ample opportunities for collusion between a corrupt government (politicians and bureaucrats), initially used to generate money to run parties and fight elections, but gradually became a means of generating personal income and wealth. Controls on pricing, production, investment and foreign trade in manufactured goods were reduced in the 1980s and lifted in the 1990s. There was also a reduction in controls on banking and finance and some simplification of taxes. This reduced the scope for corruption in reformed areas.

Incentive for corruption

But controls remained in other areas, of which the most important (from the corruption perspective) are government ownership of and/or control of land, minerals, energy and infrastructure. With acceleration in the growth of demand for natural resources, generated by the faster growth of the economy, rents inhering in these natural resources have risen, providing greater incentive for corruption. This is particularly true of tradable natural resources in which global prices have shot up (oil, coal, iron ore) and non-tradables (urban land, electricity, transport networks) in which the gap between domestic demand and supply has widened. Rising growth rates have similarly raised the rents implicit in public monopolies and the returns to those who control these monopolies.

As noted by Thakurta (2003), during the socialist era, “... Indian politicians were known to curry favour with businessmen — licences and permits would be farmed out in return for handsome donations during election campaigns. Indira Gandhi returned to power in 1980 and Dhirubhai [Ambani] shared a platform with the then Prime Minister at a victory rally. He had also become very close to the then Finance Minister Pranab Mukherjee and the Prime Minister’s principal aide, R.K. Dhawan.” For instance, in 1981, the then Maharashtra Chief Minister A.R. Antulay had to resign following a media exposé alleging that he extorted millions of dollars from businesses dependent on state resources and put in a private trust named after Indira Gandhi. “The Indian Express detailed a host of ways in which the government had gone out of its way to assist the Ambanis.” (Thakurta 2003) “In 1987, a customs show cause notice to Reliance Industries alleged that: “Reliance appears to have unauthorizedly imported four additional spinning machines (valued at Rs. 53.02 crore)...in a clandestine manner and without payment of customs duty (Rs. 119.64 crore) on these machines.” (Ninan 1987) No industrialist in India could dare to undertake such activity in the heydays of Indian socialism, without making ‘campaign contributions’ to cronies in the self-labelled “socialist” government.

More harm than good

A paper presented at the Rajiv Gandhi Institute for Contemporary Studies, New Delhi (Economic and Political Weekly, 2002), argued that the “government’s power to do harm has increased, while its power to do good has reduced.” It detailed through examples and experiences how pervasive and systemic corruption had become at all levels of government. Systemic corruption has been on a worsening trend over the past four decades. The Commonwealth Games scam was exceptional only in that money was spent in a short time to produce shoddy work under the nose of the national media. It was merely a tip of the corruption iceberg that imposes a cut of one-fifth to half on all payments for goods and services purchased by Central and State governments, the Department of Public Enterprises (DPE) and Public Sector Undertakings (PSU) from suppliers. The 2G scam was in contrast an example of the use of government policy controls over resources to create and extract rents. An Economic and Political Weekly (2000) paper on telecom reform had argued that the only way to determine the correct market price for the spectrum over any geographical area was through a competitive auction, which would allow any “natural resource rents” inhering in the spectrum to be captured by the government. The 2G scam would have been very difficult to execute if these policy recommendations had been adopted by the government earlier. The manipulation of policy by the political executive to extract rents obviously requires business partners (cronies) who will share the “resource rents” with the minister (thus jointly cheating the national exchequer). But this has nothing to do with ‘crony capitalism’ and everything to do with ‘corruption.’

Regulatory systems

A new opportunity for corruption in public contracting has arisen in the form of Public-Private Partnership (PPP) contracts. Given the limited experience in this area, initial contracts had flaws that could create opportunities for corruption. There is now sufficient experience of PPP in ‘natural monopoly’ infrastructure, to modify these contracts and build corrective mechanisms into them. Governments have also failed to build independent professional regulatory systems. Ministers who treat regulatory appointments as sinecures for favoured officials need to be exposed as indulging in (non-monetary) corruption.

Ideological labels like ‘crony capitalism’ are likely to mislead by channelling the debate into philosophical-ideological issues of capitalism and socialism and detract from finding and addressing the real problems. The real problem is the unprecedented and unique system of government controls built under the Indian version of socialism. This has resulted in pervasive and deep-rooted corruption. We need policy reforms that reduce the incentive for corruption and institutional reforms that catch, try and punish the corrupt.

With all due respect Neetika.. You may need to have homework on corruption. Your thoughts cannot be accepted.

from:
Ganesh

Posted on: Apr 10, 2014 at 13:19 IST

While it is true that the politicians are corrupt and that they end up doing scams at all the points where the government has any control over businesses, it should not be used as an excuse for deregulation.
The writer says, "With acceleration in the growth of demand for natural resources, generated by the faster growth of the economy, rents inhering in these natural resources have risen, providing greater incentive for corruption."

But are we forgetting the simple fact that natural resources are limited and finite? The writer supports the capitalist model of growth but how long can this endless growth be supported with finite resources. If all control of government is given up and all natural resources left in the hands of capitalists, they won't stop till they destroy the whole world. Capitalism has only one principle and that is of maximizing profit.
Yes, corruption needs to be controlled, but complete deregulation is not the way to do it. Both capitalism and corruption threaten us

from:
aditya thakur

Posted on: Apr 10, 2014 at 09:51 IST

It is basically a cultural problem. Indian society is particularist in culture.Laws or rules are not universally same. They are dependent on the power of the individuals involved. The more powerful people are dealt with leniency when they break law. In particularist societies any judge or policeman have to judge not only the law but also how powerful the individuals involved. We need cultural change. Changes in culture flow from top to bottom and not the other way. The only time India or Bharath had universalist culture was in Ramayana period, due to the efforts of Rama. Mahatma Gandhi affected some positive change in our society. I hope AAP people can do some thing on this front.

from:
Dr. G.S. Reddy

Posted on: Apr 10, 2014 at 02:23 IST

I second the author. The human values are rapidly decline. Politics and Economy are slowly being captured by capitalists. One of the leading cause is development of individual centred corrupt mindset. It has definitely widened the inequality and the competition thereby, corruption further. I largely oppose the crony scholar who still treats India as a welfare state. There is a difference between 4.5 and 5.4 but both are levelled as 5 whole number. Indian economy is definitely changed.

from:
Ranjan

Posted on: Apr 9, 2014 at 23:22 IST

Virmani has his own axe to grind.

from:
george

Posted on: Apr 9, 2014 at 22:25 IST

The author seems to suggest that the pill to all ills is taking away everything from the hands of the government. Kindly note that India is a welfare state, as per its Constitution. Despite this, the State in our country has already divested itself of many responsibilities in the name of increasing private participation. What has this resulted in? We no doubt have access to better services, but this access is limited on the basis of availability of resources. While it cannot be said that government alone can solve the problems ailing our democracy, let us understand that the problem is with the people manning the government. The problem is with us and not the institutions! Many of us commenting on this piece might also be gleefully accepting dividends from Reliance. Do we then have the right to comment about inequity, corruption etc.?

from:
Neetika

Posted on: Apr 9, 2014 at 17:28 IST

Gurmeet Chaddaji:
We Indians do not have unanimity on any thing. Democracy as one understands is that 'the word of the majority only shall prevail' and others views have zero relevance as seen while passing Telangana formation bill. Awarding contracts without bidding is also not a bad way provided national interest, quality work and time are the essence. All these years we are following procedures without conscience and made all cities/towns as slums and roads horrible. How can we let these things continue forever? Somebody should work like Sridharan and ameliorate things as the vast population is inert & gullible.Otherwise we will be the same in 2047 with poverty & illiteracy pestering us.

from:
Vyas K Susarla

Posted on: Apr 9, 2014 at 16:54 IST

We stand on the cusp of a change where there is a lot of space for the people but little for the leaders and intellectuals as we lack the latter two. Corruption having turned into a system of itself has gobbled up the system that the man had made to uphold a moral structure, ethical base and the secular and non-human law. And yet the inevitability of progress, that moves on, demands sustenance and a political device to hang on and to hang on to. I donât think we would ever be able to answer the question here unless some corrections are made. Correction in perception of history and the understanding of ideology- of the Socialism or of capitalism. It would not pay to assume things like the author, with a huge throng of his cronies, does. Manâs thought is relevant not only for the other man but to the time and an honest assessment of future too. Articles of this kind fail to stand that position. Corruption has made them non-starters to answer the need of the present and the future.

from:
Mohan Lele

Posted on: Apr 9, 2014 at 12:11 IST

Lots of policy changes (by the IAS mandarins in the "Biththwa Mantralaya" to to "Udyog Bhawan" , prodded and prompted by their Politicians-Masters) are plain and simple CRONY-Capitalism at work. When Cronies (thru their economist, political analysts, Biz TV anchors, erudite Columnists) talk of "Policy Paralysis" - they are complaining about "Not getting their (Cronies) THINGS their WAY ". Way back 1960s - they forced MNCs(UK mostly and few USA) to sell and handover their companies to Indian "Industrialists" (sometimes literary for a song) - who till then were TRADERS (BANIA) and made money from Tea garden to Coffee/Rubber plantations and some odd Sugar/cement factories, Daal/Rice Mills. Sound ridiculously ODD in the days of clamor for "FDI" for everything.
Specific Business houses(ex Ambani) enjoyed CLOSE PROXIMITY to PM, FM and the Party "treasurers" and 'License granted/not granted' depended solely on how close are the "fund raiser ministers/treasures/acolytes" to the CRONY-World.

from:
Haru Chandra Mandal

Posted on: Apr 9, 2014 at 11:38 IST

@Gurmeet Chadha

Excellent comment! The author is using license-raj as a boogeyman to scare us into accepting MNC-raj. Such are the men of straw that Churchill referred to - they, who have their thinking done for them by WTO, World Bank and IMF.

from:
Kumar Anantara

Posted on: Apr 9, 2014 at 10:31 IST

Though the author tries to make a valid point by differentiating between crony capitalism and plain corruption , one cannot deny the fact that they are interdependent . The Idea of Cronyism is one of the major gateways to indulge in corruption.The ills of corruption is ingrained in the system and I am afraid that it has become the life blood of Indian society. However , by doing away with all the controls held by government is not a panacea for the problem. After all who will protect the natural resources of not for the government. And as the author himself suggested , the Incentives for corruption must be reduced and there is should be an institutional reform to punish the culprits irrespective of their position in the society.

from:
Kiran S

Posted on: Apr 9, 2014 at 10:20 IST

A good article. Substantially a correct assessment of the state of affairs, post-independence. What pains the heart is the resultant penury and poverty of the downtrodden and the voiceless, amounts involved being of mind-boggling size. God save us.

from:
T.K.P.Naig

Posted on: Apr 9, 2014 at 10:04 IST

If one is averse to terminologies like crony capitalism or the present author's usage like 'crony socialism', it is their privilege to accept or reject these. That real problems should be addressed is however, correct. But here one must raise the question as to why incidence of corruption and scams is so high - both in terms of number and volume - after the 1990s. More than 95 percent of such things post 1947 occurred only in the last two decades and more. Has it nothing to do with the policies post 1990? Unless this is answered and the roots of corruption identified,every thing else is glib talk. -

from:
EM Joseph

Posted on: Apr 9, 2014 at 05:36 IST

Sir:
We all know what goes on but don't have the resourceS to fight against this. We know how much harm Congress has done over year but I am sad to say others are the same.
I would like to remind you, during Enron time, when BJP cam to power for 10 days. Mr Cheney visit India and got BJP Gov. to sign 10 billion; I am not sure of the exact amount check to Enrone. The point been with everything owned by business house; during Indira Gandhi time it was Indian companies and now International companies who is going to fight against corruption and BIG BROTHER CAPITALIST.
Wait and see how Indian in US will take advantage once the new government swears in. All regulations and tariffs will be thrown out of the window.

from:
j.chakraborty

Posted on: Apr 9, 2014 at 04:01 IST

The license-raj corruption that the author describes is well understood as corruption. What is different about Modi's "Gujarat model" is that crony capitalism is state policy. Contracts are awarded without bidding. Projects are green-lighted without proper environmental scrutiny, and land is acquired without red tape and without consultation, the Chinese way -- by simply displacing the poor and the powerless with the full power of the state. What would the author call this, other than crony capitalism? Perhaps "banana republic" would be a better term?